Frustration

Question 1

What is frustration?

Answer 1

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such cases the law declares both parties to be discharged from further performance.” - Lord Simon in National Carriers v Panalpina.

Basically, frustration is:
1. An event which significantly changes the nature of contractual rights.

Question 2

Remedies for Frustration?

Answer 2

The traditional rule for frustration, money paid prior to the frustrating even can’t be recovered back. Re Continental.
This is because obligations prior to the frustrating event remain binding. Where a contract is frustrated, obligations which arise after the point at which the contract is frustrated, are extinguished.
Exception to the rule in Fibrosa v Fairbairn - where a payment was made and the consideration had totally failed, then the money could be recovered. Reflects common law in Baltic Shipping v Dillon. There needs to be TOTAL non-performance.

Damages are only prior to the frustrating event, not post it. You won’t be liable for loss of profits.

You can’t recover for work partly done. Appleby v Myers

Question 4

What theories support the justification of Frustration?

Answer 4

1. Implied Terms theory that there is an implied term in the contract that where the frustrating event occurs, the contract will be at an end - Taylor v Caldwell.
2. Construction theory where the contract on it’s true construction, does not apply to the new factual situation. So the facts have changed and the original contract, because of a frustrating event, was not intended to apply to this new factual situation. Codelfa
   The Australian Courts prefer this approach.

Question 5

What doest the Construction theory entail?

Answer 5

The contract is only frustrated if the change of circumstances were such that the obligation was so significantly changed that the ‘thing’ would be, if performed, be different than what was contracted for. - Davis Contractors

Question 6

Where do you start with frustration?

Answer 6

You start by looking at the terms of the original contract.

The courts will look to see where the risk should/does fall.

Question 7

Davis Contractors v Fareham

Answer 7

In this case, they said the the contract was not frustrated because the new contract applied to the new circumstances, but was just more expensive. Therefore having a contract that is more expensive won’t be enough.

The facts of Codelfa were almost the same in that all it was, was an event which made the process of completion longer and more expensive, but essentially was the same. However the Courts rejected this. Why?

Question 8

Codelfa v State Rail Authority of NSW

Answer 8

They said in this case, the contract was frustrated.
Atkin J summarised:
The doctrine is now generally expressed as depending on changes in the significance of the obligations undertaken and the surrounding circumstances in which the contract was made. Both of these had changed in the current case and therefore on it’s true construction, the contract did not apply to the new facts.

Nevertheless, the question to ask is still: whether or not the contract, after the frustrating event, cover the new factual situation?

Question 9

What is the last theory?

Answer 9

This was adopted by some of the judges in National Carriers.
They said the contract was frustrated where a foundation of the contract was removed so that there was total failure of consideration.
So where the frustrating event means that there’s a total failure of consideration, the contract is frustrated.

Question 10

What are some frustrating events?

Answer 10

1. Impossibility
2. Illegality
3. Frustration of common purpose of the parties

Question 11

Frustrating event: Impossibility

Answer 11

This is when a contract is impossible to perform - Taylor v Caldwell
The subject matter of the contract, the music hall, was burnt down. It was said clearly the contract was frustrated because it would be impossible to perform the contract.

Question 12

When has impossibility as a frustrating event been rejected?

Answer 12

Tsukiroglou v Noblee
Contract for the sale of some nuts.
The Siris Canal was closed. Sellers of the ground nuts had to take ship around South Africa which was twice as expensive.
They argued contract was frustrated because the Canal was closed. They argued it was impossible to perform what was agreed.
HOL rejected this argument. A mere increase in expenses doesn’t mean contract is frustrated. The contract is not impossible to perform, it’s just more expensive.

Question 13

Can there be temporary impossibility?

Answer 13

It can sometimes be frustrated, but it depends on the duration of the contract.
If it was a contract for 5 years, and it was impossible to perform for 5 months, then it wouldn’t be frustrated.
Jackson v Union Marine

Question 14

The Eugenia

Answer 14

Charter’s took vessel on a time charter party for a trip to India via the Black Sea.
Crucial fact was there was a war clause forbidding the ship to enter into a dangerous zone without owner’s consent.
Ultimately ship entered Siris canal at a dangerous time.
Ship was trapped in Siris Canal.
On release of the ship, the charterers said the contract was frustrated.
Owner said there had been a breach.

COA held: there had been a breach of the war clause and the contract was not frustrated.
The ship could have gone around the cape of Glutou (or something) and simply because the contract was more onerous, did not frustrate it.
Weight was also placed on the cargo, which was iron and steel. Non perishable on a longer voyage, so it wasn’t time dependent.

Question 15

What is illegality?

Answer 15

Where the contract is impossible to perform because it is illegal to perform. Fibrosa v Fairbairn.

Question 16

Fibrosa v Fairbairn

Answer 16

A contract to deliver machinery was entered into with a Polish company.
Before machines were manufacture, Poland was occupied by German army.
Problem was, it was illegal to trade with enemy during war time.
It was physically possible to manufacture machines and deliver them, but was illegal.

Held: Contract frustrated on illegality.

Question 17

What is frustration of common purpose of the parties?

Answer 17

A contract may be frustrated if the common purpose of the parties can no longer be achieved. 
Three cases:
1. Krell v Henry
2. Herne Bay v Hutton
3. Scanlan's New Neon v Tooheys

Question 18

Krell v Henry

Answer 18

P hired a room on Paumound.
For some reason, they wished to see the coronation possession of Edward the 7th.
His object was to watch the possession, although this was not mentioned in the contract. The new monarch was ill.
Contract frustrated?

Held: Contract was frustrated because at the root of the contract, was the fact that the room was hard to watch the coronation possession.

Question 19

Herne Bay v Hutton

Answer 19

P hires a boat to go out to see a King inspect the fleet of Britain.
King was too ill.
Contract frustrated?
Applying Krell v Henry, it may have been frustrated because the common purpose was to watch the inspection.

Held: Contract not frustrated. The key is how the common purpose was interpreted.

Question 20

Scanlan’s New Neons v Tooheys

Answer 20

Concerned installation of neon signs for which D paid monthly rent.
WWII then broke out and government regulations forbid lighting of neon signs.
Contract frustrated?

Held by HCA: Contract can be performed and that the hirers of the signs gave no guarantee, under the contract, that the signs could be illuminated. But then you question why else would you buy a neon sign? So it’s all a matter of interpretation of what the common purpose is.

Question 21

When are courts reluctant or do not allow frustration to be pleaded?

Answer 21

1. Self induced frustration - The Super Servant
2. Where the frustrating event is foreseen by the parties - Krell v Henry
3. Where the parties have expressly provided for the consequences that have occurred, then the contract will not be frustrated. Maritime Apartments.

Question 22

The Super Servant

Answer 22

D owned two ships, having two contracts.
One with P and another contract with a third party.
Both ships were out on hire.
One of the ships sank. D decided to fulfil the contract with the third party (because they now only had one ship).

Held: Not frustrated because D themselves chose to perform the other contract and as a result the frustration was self induced.

Question 23

What is the position regarding land?

Answer 23

Traditional view is that courts are very reluctant in land transactions to say that the contract is frustrated.
Usually in the context of leases.

Good example is National Carriers. This was a shorter leease, 10 year lease. Access to property was blocked for 20 months. Held not to amount to frustration.

In Australia however:

1. Halloran v Firth - NSW Case that seems to suggest can’t use doctrine of frustration in cases of leases
2. Scanlan’s New Neon v Tooheys - One of the judge say it might be possible. He said it was only excluded where the lessee took possession under the lease.

The position in Australia is not clear.

Question 23

Appleby v Myers

Answer 23

Where There was a contract to keep machinery in good order for two years.
After some machinery had been put in but not all, factory was destroyed along with machinery. Held can’t recover.

But where work is done after the frustrating event, one can recover for work done. Codelfa Construction v State Rail Authority NSW.